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A Technical Take on Industrial ETFs with ISM Data Release

ISM Manufacturing Data is one of the first pieces of key news to start 2013, coming in slightly above expectations at 50.7. Post Hurricane Sandy, last month’s report revealed a lackluster reading. However, things have improved quite a bit since then, and we are back firmly above the important 50.0 level once more (read Top Ranked Industrial ETF in Focus: PRN).

The industrial sector has close linkages with the health of the economy and was severely affected by the hurricane and production took a beating following the disaster. Yet, with the ‘fiscal cliff’ obstacle now safely behind us and a fresh round of monetary easing expected to begin this month, it would only be fair to expect the economy to benefit out of it.

With this backdrop, let us have a technical look at the Industrial Select Sector SPDR ETF (XLI):

Looking at the one year price chart of the Industrial ETF, we can see that it has a major resistance at the $38 level which it has failed to breach (and stay above) three times in the past one year, despite coming very close. However, XLI has been making higher lows as indicated by the steadily upward rising support line.

This is surely a bullish sign for the ETF as the latest rebound from the up-trending support line has been very impressive. Although it had managed to breach the $38 level resistance in mid December, it failed to hold on to those levels and eventually slipped below the resistance (see The Guide to Broad Metals and Mining ETFs).

However, this is not entirely bad news for the ETF primarily due to 2 reasons. 1) It has very recently made a 52 week high of $38.53 on 19th December 2012 and managed to complete three trading sessions above the resistance level, 2) It is on the verge of completely conquering the $38 resistance line by going lower it (which it already has after making the new 52 week high) and coming up strong, intersecting the resistance line from below. If it does that we could very well see XLI making new highs in days to come (see The Best Investing Style ETF This Fiscal?).

Of course whether the ISM Manufacturing report adds to the bullish tone or note is a completely different story altogether. However, one thing remains certain, if we witness any substantial improvement in future data, the ETF is surely expected to receive a solid boost.

In fact, the recently concluded trading session for the ETF on 31st December 2012, was a strong indication of a positive bias, as it gained 1.87% amidst strong volumes. The ETF is currently trading near the lofty levels it reached on March 2012 and it has a strong support near the $36 mark.

Additionally, it should also be noted that the markets will be in a positive mode as we now have somewhat of a solution for the fiscal cliff. We are already seeing a relief rally, but with the debt ceiling debate looming on the horizon, it is important for traders not to get trapped by this (see more in the Zacks ETF Center).

For buy and hold investors, a long position may be better if the ETF is able to sustain above the $38 level in the subsequent trading sessions as it would mark the start of a new uptrend for the fund going further in 2013.